Hitting your thumb with the hammer

Nate Silver is dismayed by the recent Tax Bill congress passed with the aim of recouping bonuses paid to under-performing AIG executives:

The bonus tax, which passed the House earlier today, applies not only to AIG but also to some 12 other firms that received substantial levels of government assistance. This includes both financial institutions like AIG and nonfinancial ones like General Motors; it includes banks that are preforming poorly, like Citibank, and those that are holding up fairly well, like JPMorgan Chase and PNC. The government has dictated that nobody at anybody of these companies is deserving of incentive-based compensation, unless their household income is less than $250,000 per year.

Just think about some of the implications of this.

A senior engineer at General Motors, who shepherds the production of a new hybrid vehicle that will turn out to be a best-seller, shouldn't get a bonus for that. Really?

Jamie Dimon at JP Morgan, who has managed his company's assets adeptly and kept it mostly off the taxpayer's dole, is no more deserving of a bonus than an AIG crook. Really?

What you're seeing now is the ugly intersection of the technocrats at Treasury trying do their job, with the blind, populist rage of the mob. The folks at treasury could give a damned about the bonuses if addressing the fairness issues they raise stands in the way of rescuing the financial sector. Meanwhile the general public is understandably outraged by the enormous sums (compared to their own earnings) that are being thrown at the very executives who got us into this mess in the first place.

The sensible thing to do, of course, would be to let the technocrats do their job and not fan the flames of popular anger that might lead to precipitous decisions and bad legislation. A few weeks ago GOP pols seemed more concerned about government interference with the internals of business operations than they were with bailed out executives receiving scandalous compensation packages. But the issue proved too enticing to a party still reeling from electoral defeat and aching to put some chinks in the current administration's armor. And so once the issue started gaining some traction you had GOP politicians and their media shills all hitting the airwaves to express shock, shock that AIG executives were taking home big bonuses.

In fanning popular sentiment, however these Republicans put themselves in an awkward spot, seemingly committing themselves to vote for a punitive tax that they had earlier decried as government meddling in the affairs of business. So you got what we saw yesterday: when Democrats called their bluff and proposed just such a tax, over half the Republicans in congress voted for it.

What remains to be seen is what actually becomes of the bill. If it's as bad as critics maintain, it could ultimately come back to hurt the Obama administration when the President is forced to intervene and veto it. That seems unlikely, however. A more realistic outcome would be for the problematic provisions to be sufficiently watered down in the reconciliation process between House and Senate that they cause no real damage to recovery efforts while still allowing legislators to claim that they voted for a bill that curbed these sorts of pay abuses.

I'm still curious as to why no one has picked up on the larger issue of the 25% tax rate for $1,000,000 bonuses. Either there are provisions in the tax code that I'm unaware of that make this a non-issue, or this is the great un-examined scandal of the Wall-Street bonus-frenzy.